Your Ticket to the Gun Show

05/10/2013 7:45 am EST


The gun debate is raging while sales are skyrocketing, making this gun maker all the more attractive, says David Mamos of Money Morning.

In the firearms industry, sales, cash flows, margins, 50-day moving averages, and volume indicators just don't seem to matter.

Smith & Wesson (SWHC) has reported blowout numbers in its most recent quarter, including net sales of $136.2 million, an increase of 38.8% from the year earlier; EPS of 26 cents per diluted share, versus 8 cents; and 2013 guidance for gun sales raised to between $575 million and $580 million (up 40% year-over-year).

The stock currently offers no dividend, but Smith & Wesson returns value to shareholders through share buybacks. The company purchased $20 million of its own stock in December, and an additional $15 million by the end of the fiscal year in June.

These fundamentals have handily beat Wall Street's expectations, yet since the latest quarterly earnings report in early March, the stock has dropped about 11%.

As a potential buyer, that's a red flag to me. In fact, usually I would like to see the share price move above those technical levels (approximately around $9.50) and establish a bit of a base before I'd be willing to buy. But in the case of Smith & Wesson, I'm actually willing to be a buyer of this one, rather than miss out on a nearly 10% up move to those levels.

With the Second Amendment debate, the demand for guns has spiked. SWHC’s main competitor, Sturm Ruger (RGR), had to stop taking new orders because they couldn't keep up with demand.

And both companies have missed out on sales because they couldn't produce the firearms quickly enough. In the most recent quarter, Smith & Wesson's backlog was an astonishing $667.8 million—43% higher than a year ago.

Let’s make some educated guesses on how this will all shake out. First, how likely is it that there will be a ban on certain types of firearms? The short answer is very unlikely, despite what you read in the news.

Second, what would happen to Smith & Wesson sales if certain guns were banned? The conventional line of thinking (and what is most likely hindering the stock price) is that if guns are banned, Smith & Wesson sales will crater.

But I completely disagree with that assessment. If restrictions on the sale of certain guns were put into place, they would more than likely be focused on the semi-automatic class, like the AR-15, which accounts for 20% of Smith & Wesson's overall sales.

But the company already has rifles for sale that are compliant to the stricter California laws. Plus, Smith & Wesson is making headway into procuring more Military and Law Enforcement contracts.

In the meantime, let's not forget the molasses-like way the government operates. To get any possible new laws on the books takes time—time enough to plow through all the pent-up and ongoing consumer demand.

Next, how long can the gun-buying frenzy continue? According to data from the National Shooting Sports Foundation, the number of FBI background checks in March were 1,501,730, up 26.3% from a year ago. This is the 34th straight month that the figures have increased from the same month the year prior.

To sum it all up, Smith & Wesson is operating within the best of both worlds at the moment. If there are future gun restrictions and the gun-buying passion continues, Smith & Wesson is a buy, because the fear that a ban will cripple the company's business in the long-term is exaggerated.

And if there is no gun ban and business returns to usual, SWHC is still a buy, because the huge cloud hanging over it and its share price will slowly dissipate.

Read more from Money Morning here...

Related Articles:

Of Black Swans and Survival

Don't Be a Doomsday Prepper

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS